Ledn’s Weekly Hodl: How to offer yield on digital assets, responsibly.

Week of Monday August 7th

Start earning up to 9% APY on your digital assets with a Ledn Growth Account. 

Introducing Growth Accounts - a new savings experience

We’re proud to announce the launch of our new Growth Accounts for Bitcoin. In today’s essay, we’ll focus on how this new structure offers a better experience for our clients, giving you more control and more transparency!

Bitcoin Market Analysis

Over the last 2 weeks bitcoin has broken below the $30k support level and has remained below it - currently trading at $29,360. While the $30k level has been tested a couple of times to the upside, bitcoin has not seen a daily close above $30k since July 24th. In other words, the $30k level has flipped from support to resistance.

In terms of near-term catalysts, the majority of publicly traded companies that are involved with bitcoin have already reported. We saw strong results out of Coinbase, Block, Microstrategy, and PayPal. In addition to strong earnings, PayPal also announced the launch of its own stablecoin. This is an important signal to the industry as established incumbents are getting increasingly more involved with crypto.

Moreover, the mainstream media zeitgeist seems to be converging on the idea that stablecoins would benefit the U.S. dollar, and the U.S. economy - take a look at this week’s headline from the Wall Street Journal.

This narrative should act as a tailwind for politicians to work towards establishing a stablecoin framework for the U.S. over the next 6 months. 

On the ETF front, the SEC recently delayed the Ark 21 Shares ETF application decision today - which should not come as a surprise. The SEC will likely take until the final deadline dates to issue decisions on all pending applications. The next key date will be January 10th, 2024 - where a final decision is expected on the Ark 21 Shares ETF. The final decision for Blackrock’s application is on March 15th, 2024. 

In terms of long-term catalysts, take a look at some of the highlights that will be coming in the first 5 months of 2024:

March 12th - U.S. Presidential Candidates for 2024 election are announced

March 15th - Final decision on Blackrock Bitcoin ETF launch

April 15th - Tentative date for Bitcoin Halving

May 15th - Market projects Federal Reserve’s first interest rate cut

Needless to say, it looks like 2024 will be an eventful year for Bitcoin.

Our Weekly Essay:  How to offer yield for digital assets, responsibly.

Loans are as old as money. Throughout history - from seeds to gold, every form of money has had a thriving lending market. Bitcoin is a digital, more transparent asset - and for it to thrive, it will also need a lending market. 

The demand for bitcoin and digital asset lending services became evident during the 2020 runup, when tens of billions of client assets flowed to centralized and decentralized lending platforms. An environment of easy money policies and supersonic growth allowed bad actors to act recklessly and mislead consumers, without any checks and balances. All of this ultimately led to the “Sam-tastic” collapse of the digital asset lending industry in 2022. 

Although fraud is nothing new, the sudden domino-like collapse of dozens of digital asset lending firms was caused by yet another problem: the operating structure most players were using was unsustainable. There was no ring-fencing of lending risk, and there was no transparency from lenders that allowed clients to gain visibility into their process of credit underwriting, or the concentration risks in their lending activities. The legacy structure, plus absent risk management was a forest fire waiting for a spark. Terra/Luna, 3AC and FTX did just that. 

When we designed our risk management policies internally, we thought through what financial and due diligence requirements to put in place to screen borrowers, the appropriate lending parameters for the type of borrower and finally, how to protect Ledn and its clients in the event that these checks and balances fail. These tight risk management policies allowed us to navigate the 2022 storm without losing a cent or satoshi of our clients’ assets.  Even still, we learned a lot from the 2022 events, and went straight to work in upgrading every aspect of our business. 

History shows that a lending structure with no ring-fencing of risks only works when there is a lender of last resort, this is why banks need a Federal Reserve. That doesn’t exist in bitcoin, the industry needs a new model - one that doesn’t require government or state institutions as a backstop. We believe our new Growth Account model can be the blueprint to rebuild a digital asset savings experience in a sustainable and responsible way.

The case for a bitcoin lending market

Many people have been able to earn a great return on their bitcoin and digital assets by using yield offerings. These services allow digital asset holders to earn passive income, just like investors in traditional finance do. That yield is enabled primarily by lending those assets to institutional market markets. 

Bitcoin lending markets have enabled access to capital for market makers to participate in the bitcoin derivatives markets (futures and options), and help those markets flourish. This, in turn, has crushed down bitcoin price volatility, and has made bitcoin prices more stable over time.

Market-makers have also thrived in arbitraging price discrepancies across different exchanges, in doing so, they’ve obliterated the bid-ask spread across exchanges over time, to the benefit of consumers. This means bitcoiners get more dollars when they sell and more bitcoin when they buy.

The lending market is like the oil that keeps financial markets running smoothly - it not only facilitates faster settlement across entities, but a host of other functions. Bitcoin lending markets enable: options for bitcoiners to earn yield; tighter spreads to buy and sell bitcoin on global exchanges; more price stability for bitcoin spot markets; a healthy spot short market for honest actors to hedge their positions in a tax-efficient manner; and a more efficient bitcoin derivatives market for miners to hedge their production - just to name a few.

How to offer yield responsibly

Based on our learnings, we resolved to rebuild our savings experience around the pillars of trust, risk mitigation, transparency, access, and client control. We believe that Ledn’s new Growth Account structure addresses many of the systemic risks that became evident during the 2022 events. These include:

1) Ring-fencing of individual product risk

Previously, when you interacted with a company’s service - say, a bitcoin-backed loan, you were automatically commingled with the risks of their yield products. Meaning, that if the company went bankrupt because of a loan impairment in their “yield” program, your bitcoin-backed loan would have gone down with it, and you’d be stuck in a multi-year claim to maybe see some of your bitcoin collateral back one day. This is what happened at BlockFi, Celsius, Voyager and others.

Under the new Growth Account model, Ledn clients are now able to choose between holding assets in a “Transaction Account” which does not earn yield, but where assets are mostly sitting in cold storage; or they can opt into the “Growth Account'', which does earn yield and where they will only be exposed to the benefits and risks of loans issued out of the Growth Account pool of assets. That means Growth Account clients are not exposed to Ledn bankruptcy risk, and Transaction Account clients are not exposed to the risk of an institutional loan impairment issued from the Growth Account. Loans issued from the Growth Account continue to be underwritten applying Ledn’s strict risk management acumen, with even tighter covenants imposed on our institutional borrowers. 

The new structure minimizes the probabilities of an all-or-nothing outcome for all Ledn clients. In the event of a loan impairment in an institutional loan from the Growth Account, a recovery process begins. If a loan representing 10% of the Growth Account asset pool is impaired, 10% of the Growth Account client’s balance will be locked and sent to a “Loan Recovery Pool”. The remaining 90% of unimpaired assets will continue earning interest, and will be available for withdrawal should clients choose to do so by moving such assets from their Growth Account to their Transaction Account.  Any assets recovered from the impaired loan will be returned back to the client’s Growth Account. No more waiting for messy bankruptcy processes with all of your assets tied up.

2) Visibility around concentration risk in lending counterparties

When you lure billions of dollars from people into your platform under the promise of paying high yields, and there’s only one institution willing to take assets and pay those rates, you have 2 choices: you either stop lending to that institution beyond what you’re comfortable with, and lower the rates you offer to clients; or you continue lending to that institution and lend amounts way above what you can comfortably tolerate. Lending within a tolerable threshold means managing concentration risk, and it's a base pillar of risk management.

If clients could have seen how much was being lent to one counterparty - regardless of the name, they could have made different decisions. At the time of its bankruptcy filing, Voyager had 58% of its loan portfolio outstanding to one counterparty - 3 Arrows Capital. Other firms had similar concentrations with Genesis and/or Alameda.  For further context, as far as we know, 3 Arrows did not supply financial statements to lenders, which is an absolute necessity in order to properly assess the financial health of an organization BEFORE agreeing to lend to them. I bet clients would not have trusted their assets to any name that did not provide this basic information.

We wanted to address this risk head-on, so we introduced our Open Book Reports, where we outline the utilization of our assets in order to generate yield, and finance our bitcoin-backed loan operations. We break down the Growth Account loans by institution, and show what percentage each one has. The reports are currently produced once a month, and we’re working to provide updates in real time, right on our clients’ dashboard.

Concentration risk is also an integral part of our credit underwriting policy. We limit the amount any one entity can borrow to a maximum of 30% of the Growth Account assets. With the Open Book report, clients can monitor the utilization and concentration of our Growth Account assets, and make more informed decisions. 

Building a better future

If the Open Book report was an industry standard, clients from the now-bankrupt companies could have seen the levels of concentration some lenders were operating with, and decided to withdraw proactively. It could have saved thousands of people and millions of dollars.

If the Growth Account model had been an industry standard, clients from the now-bankrupt companies would have a considerable amount of their assets today. The impaired portion would be tied up in a recovery process, but having a good chunk of your assets vs. none is a materially better outcome. 

If the Growth Account model had been an industry standard, clients with bitcoin-backed loans at the now-bankrupt companies would not have been affected.

The new structure creates a much better experience for clients - one where they are informed to make better decisions, have more options to choose from, and where the risks and benefits of a particular service are distributed among the clients that chose to participate in it.

Bitcoin is maturing, and so are its lending markets. This new structure is a time-tested solution to an old problem - in a modern asset class. It will be a solid and sustainable foundation over which a thriving lending ecosystem can be built.

The future looks bright.

Notice for Canadian Residents: As of August 3, 2023, any Canadian BTC or USDC Savings Account is transitioned into a new non-interest earning BTC or USDC Transaction Account for the purposes of allowing Canadian clients to manage their Ledn loans.

Notice for U.S. Residents: As of August 3, 2023, any U.S. BTC or USDC Savings Account is transitioned into a new non-interest earning BTC or USDC Transaction Account. On that date, the account balance in any U.S. Legacy Savings Accounts will remain in such accounts and continue to be non-interest earning. 

This article is intended for general information, educational and discussion purposes only, it is not an offer, inducement or solicitation of any kind, and is not to be relied upon as constituting legal, financial, investment, tax or other professional advice. This article is not directed to, and the information contained herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to law or regulation or prohibited by any reason whatsoever or that would subject Ledn and/or its affiliates to any registration or licensing requirement. This article is expressly not for distribution or dissemination in, and no Ledn product or service is being marketed or offered to residents of, the European Union, the United Kingdom, the United States of America or any jurisdiction in Canada, and such product or service may only be marketed or offered in such jurisdictions pursuant to applicable laws or reliance on regulatory exemptions. A professional advisor should be consulted regarding your specific situation. Digital assets are highly volatile and risky, are not legal tender, and are not backed by the government. The information contained in this publication has been obtained from sources that we believe to be reliable, however we do not represent or warrant that such information is accurate or complete. Past performance and forecasts are not a reliable indicator of future performance. Any opinions or estimates expressed herein are subject to change without notice. This article may contain views or opinions of the author that do not necessarily reflect the opinions, standards or policies of Ledn. We expressly disclaim all liability and all warranties of accuracy, completeness, merchantability or fitness for a particular purpose with respect to this article/communication. Read our Disclaimers at https://ledn.io/legal/disclaimers